Appendix 3: Small and medium-sized enterprises (SMEs)

A number of the Inquiry's recommendations are designed to reduce structural impediments to SMEs' access to finance. Such impediments include information imbalances between lenders and borrowers, and barriers to market-based funding. Other recommendations would help reduce costs for SMEs and support innovation.

The Inquiry encourages industry to expand data sharing under the new voluntary comprehensive credit reporting (CCR) regime (see Recommendation 20: Comprehensive credit reporting in the Chapter 3: Innovation). More comprehensive credit reporting would reduce information imbalances between lenders and borrowers, facilitate competition between lenders, and improve credit conditions for SMEs. Although CCR relates to individuals' data, personal credit history is a major factor in credit providers' decisions to lend to new business ventures and small firms.

The Inquiry supports a facilitative regulatory regime for crowdfunding, while recognising the risks involved (see Recommendation 18: Crowdfunding in Chapter 3). A well-developed crowdfunding sector would give SMEs more funding options and increase competition in SME financing. The Inquiry supports Government's current process to graduate fundraising regulation to facilitate securities-based crowdfunding. Government should use these policy settings as a basis to assess whether broader fundraising and lending regulation could be graduated to facilitate other forms of crowdfunding, including peer-to-peer lending.

Information imbalances, among other factors, have led to numerous and onerous non-monetary terms in some lending contracts. The Inquiry supports Government's current process for extending consumer protections for unfair terms in standard contracts to small businesses (see Recommendation 34: Unfair contract term provisions in Appendix 1: Significant matters). Although such protections would not prevent unfair terms in non-standard contracts, the Inquiry believes this approach may improve broader contracting practices. The Inquiry also encourages the banking industry to adjust its codes of practice, to require banks to give borrowers sufficient notice of an intention to enforce contract terms and give borrowers time to source alternative financing.

Recommendations to reform the payments system would benefit SMEs (see Recommendation 17: Interchange fees and customer surcharging and Recommendation 16: Clearer graduated payments regulation in Chapter 3). The Inquiry's proposals to lower interchange fee caps would reduce the fees paid by all businesses and reduce the difference in fees paid by small and large businesses.

As technology evolves, greater access to data and innovations in data use are likely to benefit all businesses, particularly SMEs. For example, more extensive access to quality datasets would improve business decision making. Globally, payment providers are developing new ways to assess SMEs' creditworthiness and extend credit to SMEs. The Inquiry recommends that the Productivity Commission review how data could be used more effectively, taking into account privacy considerations (see Recommendation 19: Data access and use in Chapter 3).

The Inquiry considers that financial system innovators which challenge the existing regulatory structure should have better access to Government, and that Government and regulators should have greater awareness and understanding of financial system innovation. This would enable timely and coordinated policy and regulatory responses to innovation. The Inquiry recommends that Government establish a permanent public–private sector collaborative committee, the 'Innovation Collaboration', consisting of senior industry, Government, regulatory, academic and consumer representatives (see Recommendation 14: Collaboration to enable innovation in Chapter 3).

Better targeted tax settings for start-ups and innovative firms would facilitate innovation. Simplifying the tax rules for Venture Capital Limited Partnerships, and streamlining Government administration of the regime, would reduce barriers to fundraising. More flexible access to research and development tax offsets could help reduce firms' cash flow constraints, particularly for new ventures. These issues should be considered as part of the Tax White Paper process (see Appendix 2: Tax summary).